Cases in Engineering Economy, Case #51
EIN 6357 Case #1 (Rev 5_15)
Cases in Engineering Economy, Case #51
Upon successful completion of this case you will demonstrate that you can
? Read and interpret the facts of a realistic case
? Create a spreadsheet to analyze the project options and appropriately annotate the spreadsheet
? Evaluate the various economic options using appropriate economic analysis techniques
? Synthesize the information to make recommendations for funding of capital budget projects
? Prepare a memo for management which clearly explains the rational for the recommendations.
When reading the case, consider the following questions:
A) Which regulatory required project is obligatory (no choice, must do)?
B) Which other regulatory projects are mutually exclusive where one of the two must be funded?
Hint: Rate of return on the incremental investment must be performed since these are mutually exclusive. Put the lower cost alternative on the list, then put an incremental option (the difference between the two) then when you sort by IRR, if the increment is justified it will be above the MARR on the list.
C) Which project is needed to support current product growth? Are you assuming these “must” be done or are discretionary?
D) Which projects have dependencies? What are the dependencies?
Hint: Analyze all three projects of these independently to begin with and see how they compare to the IRRs of the other projects.
Hint: Remember that you cannot get the benefits of the dependent project without the independent project. So once you have determined a dependent project to be worthwhile, the IRR you need for comparison in the budgeting process is the IRR for both the dependent and independent combined.
E) What is the total capital budget that has been allocated by the board? How much of this must be set aside for small unforeseen problems or opportunities during the year.
F) Knowing that projects typically overrun the budgets, how will you account for this in the budget?
Suggested approach for analysis*
1. Create a section of the worksheet for basic case data (not project specific)
2. Enter the data for the projects from the project list. Add an IRR and a notes column.
3. Add to the bottom of the list, any combinations or incremental analyses you want to perform.
4. In the notes column, note “must” information, any dependencies and other information that may help you as you work through the analysis.
5. Copy the above table of project data (except for notes column) and do a paste special of the values. (You do not want to paste the formulas in this case because when you sort, you it will mess up the ones that are combinations of others.)
6. Move to the top of the table, those projects that are obligatory.
7. Move below the table (leave an extra blank line in between), those line items no longer in the analysis, such as the dependent projects stand-alone lines)
8. Sort the projects below the obligatory ones by IRR (ignoring the ones below the blank line)
9. Add a column off to the right for cumulative first cost.
10. Determine the projects that should be funded and MARR.
11. Format the worksheet to use as an attachment to the memo.
*You may want to take a different approach if you can visualize in advance how you might want to format the
worksheet for use as an attachment.
Turn in requirements
Write a memo to the board (1 to 1 ½ pages). In the memo, summarize the analysis indicating the projects
recommended and referring them to the attachments for detail. Indicate how you considered potential project
overruns and unexpected project. Also explain how the MARR was determined that should be used for analyzing
the as-yet unidentified projects.
The memo should refer to the following attachments.
Attachment 1. Table showing budget allocations and information about the items in it. Total allocations
must equal the board budget. List notes or assumptions should be placed below the
Attachment 2. Table of non-funded projects with list of applicable notes or assumptions below the table.
Attachment 3. Detailed calculations/spreadsheet.
Grading – 50 points possible
7.5 Correct identification of potential budget items from case scenario
(1.5) Obligatory budget items
(1.5) Growth projects
(1.5) Dependencies between projects
(1.5) Set-aside for unforeseen/small projects
(1.5) Overrun consideration
20 Appropriate and correct analysis – 5 points each
(5) Appropriately analyzed projects on individual basis
(5) Incremental analysis performed as required
(5) Appropriately analyzed dependent projects
(5) Correct method for selection of projects to the budget limit
3 Spreadsheet presentation – easy to follow, appropriately annotated.
17 Memo and attachments 1 and 2
(5) Clear summary of analysis performed with appropriate reference to attachments
(3) Rational approach to overruns and as-yet identified projects
(4) Clear and correct explanation of MARR to be used for as-yet identified projects
(3) Selected (and not selected) projects clearly identified
(2) Appropriate notes on attachments.
2.5 Presentation, grammar, spelling, clarity of writing – deductions made relative to the following:
? Memo and attachments are business appropriate.
? First person should not be used.
? Proper grammar and spelling is important. (Only 1 misspelling/incorrect grammar/typo allowed.)
? Long paragraphs with multiple topic changes reduce clarity.
? You are writing this as the engineering manager (not as a student). Stay in context – do not refer to